Microsoft are already aware [latimes.com] of sex-themed software for Kinect, and have rejected licensing and support for that purpose. As others have pointed out ad-nauseum, it's very hypocritical - You can massacre a whole room full of innocent bystanders in Modern Warfare 2, but you can't pinch a virtual tittie?

It's a shame, because Microsoft and its licensees are missing out on so much potential revenue. Your idea would be well-suited to those minigames between stages where both players have to hammer both buttons as fast as they can, and the first one to inflate the balloon or destroy the car won. Except, instead of pressing the buttons, you're jacking off. Against another man, who is standing right next to you. That would be a cool arcade.